Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING (CREDIT)

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING (CREDIT) IN THE AMOUNT OF SDR59.6 MILLION (US$98.10 MILLION EQUIVALENT) TO DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA Sustainable Development Department Sri Lanka Country Management Unit South Asia Region FOR THE ROAD SECTOR ASSISTANCE PROJECT June 23,2008 Report No LK This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 3 1,2008) Currency Unit = Sri Lanka Rupees (SLRs) US$ 1.0 = SLRs SDR 1.0 = US$ FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS DO EIRR GDP GOSL HDM-4 IDA IRI MOHRD NPV NRMP RDA RSAP RMTF SDR voc Country Assistance Strategy Development Objective Economic Internal Rate of Return Gross Domestic Product Government of Sri Lanka Highway Development & Management Model-4 International Development Association International Roughness Index Ministry of Highways and Road Development Net Present Value National Road Master Plan Road Development Authority Road Sector Assistance Project Road Maintenance Trust Fund Special Drawing Rights Vehicle Operating Costs Vice President : Praful C. Patel, SARVP Country Director : Naoko Ishii, SACSL Sector Director : Constance A. Bernard, SASSD Acting Sector Manager : G. George Tharakan, SASDT Task Leader : Amali Rajapaksa, SASDT

3 FOR OFFICIAL USE ONLY TABLE OF CONTENTS PROJECT PAPER DATA SHEET... Page (i) A. INTRODUCTION... 1 B. BACKGROUND AND RATIONALE FOR ADDITIONAL CREDIT IN THE AMOUNT OF US$ 98.1 MILLION... 1 C. PROPOSED CHANGES... 3 D. CONSISTENCY WITH CAS... 5 E. ECONOMIC ANALYSIS OF COST OVERRUN... 6 F. EXPECTED OUTCOMES... 6 G. BENEFITS AND RISKS... 6 H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL CREDIT... 7 ANNEX 1: REVISED ESTIMATED PROJECT COSTS ANNEX 2: DISBURSEMENT SCHEDULE ANNEX 3: SUMMARY OF THE REVISED ECONOMIC ANALYSIS This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 PROJECT PAPER DATA SHEET Environmental Category: B Borrower: Responsible agency: Democratic Socialist Republic of Sri Lanka Road Development Authority - Does the scaled-up or restructured project trigger any new safeguard policies? No - P For Additional Credit [ ] Loan [XI Credit [ 3 Grant For Loans/Credits/Grants: Total Bank financing (US$m): Proposed terms: Standard IDA Credit, 20.0 years to maturity, 10 years grace [DA i

5 A. INTRODUCTION 1. This Project Paper seeks the approval of the Executive Directors to provide an additional Credit in an amount of US$98.10 million to Sri Lanka Road Sector Assistance Project (RSAF ; Project ID: PO8641 1, Credit Number: 4138-CE). The proposed additional Credit would help finance the costs associated with the cost overrun of civil works under the National Roads Component of the Project - details are discussed below. There would be no changes to the original design and ongoing activities of the Project. B. BACKGROUND AND RATIONALE FOR ADDITIONAL CREDIT IN THE AMOUNT OF US$98.10 MILLION Proiect Data and Performance 2. RSAP was approved on December 15, 2005, with a Credit amount of SDR69.1 million. Key project data and performance are summarized below: Key Project Data Credit Amount: US$ 100 million equivalent Effectiveness date: March 16, 2006 Closing date: September 30, Project Age: 30.1 months (44%) Credit Disbursed: US$68.3 million equivalent (64%) Project Performance Development Objectives: Implementation Progress: Environmental Safeguards: Social Safeguards: Risk Flags: Satis factory Satisfactory Satisfactory Satisfactory None 3. The Development Objective of the project is to lower transportation costs through sustainable delivery of an efficient national road system that serves the needs o f road users and the Sri Lankan public at large. This is to be achieved through implementation of the following three project components: a. Maintenance and Rehabilitation of National Roads Component: This consists of: (i) civil works along national roads comprising resurfacing and improvement of about 620 km of Class A and B roads; (ii) technical assistance for the feasibility study, and the design and construction supervision of these works; and (iii) goods and incremental operating costs. b. Maintenance and Rehabilitation of Rural Roads Pilot Component: This consists of: (1) developing a strategy for the management of rural roads; (ii) rehabilitation and maintenance of about 635 km of rural roads in nine local government areas (Pradeshiya Sabhas) whose selection is based on the recently completed poverty map for Sri Lanka; (iii) training and institutional strengthening; and (iv) goods and incremental operating costs. C. Institutional Strengthening and Policy Support Component: This component comprises technical assistance to implement improved sectoral policies for road maintenance financing. 4. The Project impact is monitored through improvements in key performance indicators relating to: (a) vehicle operating costs; (b) road network condition; and (c) annual maintenance expenditures. All ratings including the Development Objective and Implementation Progress have been consistently rated as Satisfactory in all of the previous Implementation Status and Results reports since: (a) there is progress towards institutionalization of a secure and stable road maintenance funding arrangement where the Road Maintenance Trust Fund has been set up and is continuing to provide the agreed level of funding to the national roads network; (b) network in poor condition has reduced resulting in tangible improvements in ride quality as evidenced by recent road roughness surveys; (c) all 12 national roads 1

6 civil works contracts valued at SLRs billion (US$ million') amounting to 100% of the total works have been awarded and works are underway on all contracts with physical and financial progress at 42% and 38% respectively; and several stretches of road aggregating to 148 km reopened to traffic already; and (d) the rural roads pilot component has made considerable progress with the first set of bid documents already been issued. 5. All legal covenants have been fully complied with. Compliance with fiduciary, and environmental and social safeguards continues to be satisfactory. Causes of the Cost Overrun 6. The Maintenance and Rehabilitation of National Roads Component2 has experienced significant cost overrun estimated at US$98.10 million, i.e. 59.2% of the Project cost, from the approval of the Credit in December 2005 to date. This cost overrun is primarily due to the following two reasons: a. The unprecedented oil price increase in the world market that has led to the escalation of prices in oil-based materials. In particular, the price of bitumen has increased by 433%, from SLRs.19.0 per liter at the award of the contracts to the current price of SLRs per liter. In the past annual price increase in bitumen had only been about 15%. The prices of other road construction materials have also skyrocketed due to higher transportation charges. The price of fuel has increased from SLRs.46 per liter at the start of the Project to the current price of SLRs.157 per liter, Le. 241% increase. The impact of price escalations on the revised contract values is captured below. Contract Package CPOl CP02 CP03 CP04 CP05, CP06 CP08 CP09 CPlO cpll CP12 PriceEscalation (US%Mn) As a % of total contract 31% 20% 32% 31% 22% 26% 31% 28% 31% 26% 33% CP % b. The use of higher standards for national highways to improve safety environment as stipulated in the National Road Master Plan (NRMP) adopted in December This new policy of the Ministry of Highways and Road Development (MOHRD) necessitated widening of roads under the project to 6.2 meter national standards with 0.65 meter hard shoulder on the inside of the numerous bends. As a result of the change in width of carriageway, all culverts had to be extended. In addition, embankment trimming necessary for the widening resulted in an increase in the amount of retaining walls. Some additional works are required such as raising some sections due to water logging, gabion retaining walls adjacent to paddy fields, protection of the embankment slopes in wet areas, guard rails for safety reasons, and additional provisions to minimize project affected persons. These additional works are technically justified and would contribute to higher quality and safer highways. The impact of the changes from the NRMP on the revised contract value is captured below. 7. Furthermore, due to the time period between estimates, start of works and implementation, as well as abnormal rain fall, the project roads deteriorated necessitating some design changes such as additional regulating course. Exchange Rates at Contract Awards. * Costs of other components of National Roads and Institutional strengthening and policy support are within the original estimate. 2

7 Contract Package CPOl CP02 CP03 CP04 CP05. CP06 CP08 CP09 CPlO cpll CP12 Impact ofnrmp(uss Mn) As YO oftotalcontract cost 15% 12% 11% 11% 8% 13% 4% 7% 12% 3% 6% CP % Cost Item Price Escalation National Road Master Plan Standards Total As a Percentage of total increase 81% 19% 100% 8. Eighty one percent of the increase is attributable to escalation in the price of materials. The estimates for price escalation allow for increases in prices from commencement to end o f project derived from a trend analysis of historical data. Since the projections are based on the current fuel prices, the estimates include 10% additional price contingencies to deal with any further price increases. The price escalation is also based on the revised contract periods. As the revised project cost incorporates costs associated with the agreed widening and additional works, no further physical contingencies have been provided. As a consequence of the above increase in project cost, the Value Added Tax (VAT) amount has also increased by US$12.8 million3. See Annex 1 for revised project cost. 9. only. The additional Credit will be utilized to finance the civil works of the national roads component 10. In view of the rural roads component being a pilot, it has been agreed that civil works will be designed to remain within the initial financial envelope of the component and the original allocation of funds for rehabilitation of prioritized rural roads remains unchanged. Rationale for Additional Credit 1 1. The causes of the cost overrun were outside the control of the project. The additional Credit will allow for completion of the civil works in the project. Without additional Credit, the PDO would not be achieved and the three impact indicators; reduction in average Network Roughness, reduction in Vehicle Operating Costs (VOC), and reduction in network in poor and bad condition would be compromised. C. PROPOSED CHANGES 12. There are no changes in the PDO, design, and/or scope. There are no changes applicable to the institutional arrangements, implementation mechanism, financial management, disbursement arrangements and closing date. 3 From US$ million to US$34.42 million. 3

8 Financing Plan Total IDA I GOSL Project cost in the Parent Project VAT 21.6 Initial project cost % share 100% Total Additional Credit YO share 100% Revised Total project cost % 39% I % 0 Yo Implementation Schedule - Extensions of contract periods will be granted to all of the packages in order to allow for time required for additional works as well as for time extensions already justified by the actual progress in contract execution. The first contract will be completed in October 2008 whilst the final contract in RSAP is expected to be completed in May Activities financed by the parent project and the additional Credit will be completed by March 31, 2011 and the Credit account itself will be closed by September 30, 2011 with no extension anticipated. 15. Institutional Arrangements - The additional Credit will be implemented through the same mechanism as the parent project where the implementing agency is the Project Management Unit (PMU) within the Road Development Authority (RDA), overseen by the MOHRD. 16. Disbursement Arrangements - A new designated dollar account will be created for the additional Credit, as the disbursement percentage for additional Credit will be different from that o f the parent project. Advances to the Special Dollar Account will be provided using interim un-audited financial statements (IUFS). The project will follow report-based disbursement procedures. A separate set of IUFS will be prepared for the additional Credit and submitted to IDA on a quarterly basis within 45 days from the end of the calendar quarter. Annex 2 includes the disbursement schedule for the parent project and the additional Credit. 17. The IDA financing for civil works in the parent project is based on a descending scale from 80% in year one to 65% from year three onwards. In the additional Credit, the IDA amount of US$98.10 million will finance 100% of the civil works cost. The disbursement from the additional Credit will commence upon the complete withdrawal of the funds allocated to the civil works component of National Roads under the parent project and IDA has received confirmation that counterpart finance applicable to payments under the parent project has been or will be made. Funds in relation to the additional Credit will be required from GOSL only in the event of further cost increases over and above the additional Credit. 18. Financial Management - The same financial management and disbursement arrangements used for the on-going RSAP will apply to the additional Credit. The project has a Moderate Financial Management (FM) risk rating. The PMU has a proven track record of sound financial management and compliance with financial covenants. The project will continue with on-going risk mitigation measures that include: internal and external audit, robust internal control procedures with adequate technical certification of construction progress and quality before making payments; continuous and comprehensive internal audit including the identification of process related bottlenecks; a fully integrated MIS which generates exception reports, links financial and physical progress, establishes the link between 4

9 procurement plans and payments; independent fixed asset verification of equipment and vehicles; and robust complaints handling mechanism. IDA will carry out a risk-based review of selected FM activities. 19. Procurement - The procurement thresholds and methods will remain the same as per the original RSAP project. The guidelines applicable to all new procurement under additional Credit will be in accordance with the Guidelines, Procurement under IBRD Loans and Credits dated May 2004 (revised October 2006) and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 (revised October 2006). However, contracts currently under implementation will be treated under the Guidelines set forth in the original Financing Agreement. The project will adhere to financial authority level for procurement decisions and appoint procurement committees for the respective financial levels as set forth in the Government of Sri Lanka s Procurement Manual All the consultancies, works and goods have already been procured under the parent project. In the event o f a new procurement taking place, the bid documents currently in use under the original project will be reviewed and approved along with new procurement plans consistent with revised procurement guidelines for procurement under additional Credit Environmental Safeguards - The environmental safeguard policies including Environmental Assessment and Management Framework (EAMF) and Social Impacts Management Framework (SIMF) developed for the RSAP will also apply to the additional Credit. Individual civil works contractors have developed Environmental Method Statements (EMSs) identifying location and site specific details on environmental and social issues. The anticipated changes in road width do not require the preparation of new Environmental Management Plans (EMPs), as the original EMPs had taken this into account. The EAMF and SIMF were publicly disclosed prior to the Appraisal of the RSAP and were based on the respective Frameworks; EMPs for all contracts were also publicly disclosed. The additional work and minor widening being done does not trigger additional safeguards policies and will continue as a category B project. 22. Social Safeguards - In order to mitigate the anticipated negative impacts and in compliance with OP 4.12, the Project has an SIMF in place. It includes a detailed entitlement matrix for all types of negative impacts for all categories of affectees, a grievance redressal mechanism, a public consultation strategy, disclosure mechanism etc. SIMF is under implementation. Land acquisition wadis not envisaged in the project and additional Credit nor is there any resettlement. Most of the impacts are minor, leading to loss of some minor asset/infrastructure (a portion of a wall, etc). During implementation, since the number of affectees totaled more than 200, a Resettlement Action Plan (RAP) is under preparation and a draft has been publicly disclosed. Along with addressing all the negative impacts, the RAP will also mainstream the process for land donation (that is in practice). The system is a transparent and equitable one, laying out the nature of voluntariness and ensuring that there is no loss of livelihood. All aspects are documented through an agreement between the donor and the recipient. The RAP will also mainstream the public consultation and grievance redressal mechanism that is being implemented. The social impact of any design change including that of extension of conidor by three meters will be reflected in the RAP. D. CONSISTENCY WITH CAS 23. The RSAP is consistent with the Country Assistance Strategy (CAS) approved by the Board on the 5 June 2008 by providing mobility for goods and people as it allows the economic dynamism of the Western province to spill over to the rest of the country and thereby to contribute to economic growth as well as reduce regional inequality. This is also recognized as a high priority by the GOSL. The CAS of 2004 to 2007 also supported investment in roads as one of the core infi-astructure areas needed to support 5

10 pro-poor growth via reduced transport costs. Both CASs give high priority to the development of road infi-astructure and recognize its contribution to economic growth and poverty reduction. E. ECONOMIC ANALYSIS OF COST OVERRUN 24. As described in previous sections, the cost overrun in RSAP is mainly the result of a significant increase in the price of fuel (+241%) and bitumen (+433%) and an expansion in project scope to comply with new standards adopted in the National Master Plan (December 2007) to improve safety. Price escalation represents 81% of the increase in construction costs and changes in project scope represent 19%. The revised economic analysis has adopted the Highway Development and Management Model 4 (HDM 4), the same methodology as in the 2005 study. The analysis covers a projected period of 10 years, with initial investment in 2005 and 2006 and the year of 2017 as the end of period of analysis. Benefits result from savings in vehicle operating costs and savings in time. Vehicle parameters and unit costs were updated with 2007 information. Annex 3 summarizes road parameters and key assumptions of the economic analysis. 25. The analysis concludes that the revised overall Economic Rate of Return (ERR) for the 598 km of roads is 26.2% with a Net Present Value (NPV) of US$184 million. This is a substantial increase compared with the NPV of US$102.5 million for the 620 km of roads in the project at appraisal. This can be explained by an increase in savings in vehicle operating costs higher than the increase in construction costs between the initial economic analysis and the revised analysis. Several sensitivity analyses were carried out which confirm that the economic justification of the project is quite robust against uncertainties in traffic growth and vehicle operating costs. Detailed flows of costs and benefits for each road are available in the project files. Annex 3 presents a detailed analysis together with ERRS and NPVs for each road in the project. F. EXPECTED OUTCOMES 26. The expected outcome of RSAP is lower transportation costs through sustainable delivery of an efficient national road system that serves the needs of road users and the Sri Lankan public at large. The outcome is on track and the additional Credit will help ensure that it is ultimately achieved. G. BENEFITS AND RISKS 27. The RSAP is aimed at lowering transportation costs and travel times by improving the condition of National Highways, which are the backbone of Sri Lanka s economy. This would help farmers transport their produce to markets on time, increase export competitiveness, accelerate export led growth and contribute to sustained economic development. Road users and inhabitantshusinesses along this densely populated corridor will be direct beneficiaries of the proposed additional Credit. 28. There are no additional risks associated with this additional Credit. However, there are two existing risks: (a) bitumen shortages - Shortages o f Bitumen over the past couple of months have affected the implementation progress. This risk is being mitigated by allowing the contractors to import bitumen from their own sources through the RDA import license and assurance has been provided by the MOHRD that the arrangement would continue until the completion of the project; and (b) delays in counterpart funds for the parent project - this risk is being mitigated by establishing an account exclusively for the project for receipt of domestic funds rather than such funds being channeled via MOHRD. The Ministry of Finance has also confirmed the timely availability of domestic funds for the parent project as well as for the additional Credit in the event o f the cost overrun being over and above the amount of US98.10 million currently estimated, given the importance of the project in the GOSL portfolio. 6

11 29. The PMU together with IDA will identify a risk matrix that will impinge on the project funds being spent for the purpose for which it was intended and take appropriate steps to mitigate such risks. Such risks and the measures for mitigation will be reviewed during project implementation support missions. H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL CREDIT 30. The financial terms of the US$98.10 million of additional Credit are the same terms currently offered to Sri Lanka, i.e. a 10 year grace period and 20 year maturity with repayments occurring from year 11 to 20 at zero interest payment and a service charge at the rate of three fourths of one percent per annum on the principal amount of the Credit, withdrawn and outstanding from time to time. The maximum commitment charge rate payable will be one half of one percent on the un-withdrawn Credit balance. The Credit will be denominated in SDR There are no effectiveness conditions. 7

12 Annex 1 REVISED ESTIMATED PROJECT COSTS Project Cost By Component and/or Activity Local 1. Maintenance and Rehabilitation of National Roads 600 km of national roads Feasibility, design and supervision Training & Institutional Strengthening Goods Incremental Operating Costs 2. Maintenance and Rehabilitation of Rural Roads 635 km of rural roads Strategy, feasibility, design and supervision Training & Institutional Strengthening Goods Incremental Operating Costs 3. Institutional Strengthening and Policy Support Consultant Services for Sustainable Maintenance Financing Mechanism Total Baseline Cost 8% Physical Contingencies 10% Original Price Contingencies plus 10% provision for future 15% Value Added Tax Total Project Costs Interest during construction OO Front-end Fee Total Financing Required

13 DISBURSEMENT SCHEDULE Annex 2 Years Ending June 30 US$ Million Financing IDA Government Others Total Project Financing The VAT of US$ million has been included in total. The VAT of US$12.80 million has been included in total. 9

14 Annex 3 SUMMARY OF THE REVISED ECONOMIC ANALYSIS 1. The following sections present the modifications in the scope of works, compare construction costs at completion of works and as estimated at appraisal, present the main assumptions for the calculation of benefits and provide the detailed flow of costs and benefits for the entire project. Data for each road are available in the project files. Contract Nos. Road Nos. Remarks CPOl CP02 CP03 CP04 CP05 A008 Widen to 6.2m A001 A016 BO44 A017 Increased 5.5m to 6.2m Widen to 7.4m plus lm hard shoulder Widen to 6.2m plus lm soft shoulder plus 0.65m widening on bends Varies to 6.2m plus 0;65m soft shoulder plus lm widening on bends BO km at 5m plus lm soft shoulder B km at 6.2m plus lm soft shoulder A km at 6.2m plus lm hard shoulder plus 1.5m gravel shoulder; Bypass road CP08 (connects A014 road at km and A009 road at km ) CP09 A014 A004 A025 Increased 5.5m to 6.2m km at 6.2m plus lm gravel shoulder 60km at 6.2m and 9.15km at from 5.5m to 6.2m, "lo A031 Note: No details in original ERR for this section CP11 A01 1 Widen to 6.2m CP12 A01 1 Change in start point CP 13 A0 10 Original width 6.2m - no change 2. In the absence o f traffic counts, the revised economic analysis has used the 2005 data used in the initial economic analysis projected during the period of analysis using the growth rates of the initial economic analysis. 10

15 Variation orders and Construction costs 3. The value of time was updated based on the increase in growth of GDP per capita (2005% 11%, 2006: 7.5%, 2007: 9.3%). In 2007, the price of gas and diesel had increased by 241% compared to the price at appraisal. Total I 30.8% % In all cases except two (A014 and A016), the NPV discounted at 12% is positive confirming the economic justification of the project even though the cost of civil works increased significantly. Six roads have a higher ERR and NPV than at appraisal. Eight roads have a lower ERR and NPV than at appraisal. 11

16 With two exceptions, the increase in construction costs per kilometer on roads which have a higher economic justification is less than 109%. When the increase in construction costs per kilometer is higher than 159 percent, the ERR and NPV are lower than at appraisal. 5. The first reason which explains this difference is the relative increase in construction costs compared to the increase in VOCs and savings. VOCs have increased due to the price of inputs such as fuel and lubricants which saw a major increase (241%) but also due to the general inflation for other inputs. Savings which are the difference between the VOCs with and without project have increased by the same rate. The second reason is that the roads deteriorated between the time the initial economic analysis was carried out and the time execution of the works started and roads were improved. This resulted in higher savings on VOCs than estimated at appraisal, further confirming that the maintenance/improvement of the roads was justified. The third reason is that the roads became operational one year later than expected at appraisal and as a result the savings in the revised economic analysis are based on 2008 traffic volumes while they were based on 2007 traffic volumes in the initial economic analysis, about 5.5% less than in As benefits have increased at the same time than costs increased, it seems then that there is a threshold between the two percentages above (109 and 159%) under which the increase in savings is higher than the increase in costs resulting in a higher ERR and NPV. Above the threshold, the increase in construction cost is higher than the increase in savings resulting in lower ERR and NPV. Sensitivity Analysis 6. The following table presents the results of the sensitivity analysis. The sensitivity analyses considered are: 20 percent decrease in traffic growth; zero traffic growth; 20 percent decrease in savings on vehicle operating costs; and 20 percent increase in construction costs. 7. The combination of the three last sensitivities above provides the lowest rate of return and NPV. In this case, the NPV discounted at 12% is negative. However, this sensitivity is unlikely to happen as traffic is expected to grow to accompany the current economic growth. There is also little uncertainty on the cost of the works as a number of contracts are near completion and the cost of other contracts have been updated to take into account the price escalation as well as revisions of design agreed with the contractors. VOCs are also unlikely to be reduced in view of the past trend for the price of inputs such as fuel, lubricants, tires, and salaries. 8. Results are presented for the base case excluding savings in time and the residual value of the road after 10 years as the actual life of the road is expected to be longer. 12

17 Net Benefits Case Sensitivity Scenarios NPV 12% ERR (1,000 Rs) 1 Base case 26.2% 17,685 2 No Traffic Growth, 9.4% -3,240 Costs up 20% and VOC down 20% 3 VOCdown20% 21.0% 11,918 Excluding time savings Excluding time savings and residual value NPV 12% ERR NPV 12% (1,000 ERR (1,000 Rs) Rs) 23.6% 15, % 14, % -5, % -7, % 7, % 6,506 13

18